Portugal has passed the third review of its 78-billion-euro bailout programme by the European Union and IMF but the country's economic slump will deepen this year, Finance Minister Vitor Gaspar said on Tuesday.
Officials from the European Union and IMF will recommend disbursement of the bailout's next tranche of 14.6 billion euros (12.4 billion pounds) after finding Portugal has met fiscal goals and launched reforms to make the economy more competitive, the minister said.
The result (of the evaluation) was positive despite unfavourable conditions, Gaspar told journalists. The mission (of officials) confirmed the fulfilment of the criteria demanded by the terms.
But Gaspar changed the government's outlook for this year's economic slump - the deepest since the 1970s - to a contraction of 3.3 percent from a previously forecast 3 percent decline.
He also said unemployment, which is already at record highs, would worsen both this year and next. The jobless rate will now reach 14.5 percent, up from the government's previous estimate of 13.7 percent.
European officials have been eager to distance the euro zone's second most risky country from troubled Greece. But many economists say the country may have to seek more emergency funding or even be forced to restructure its debts like Athens.
We are currently working on an assumption that they will need a second bailout before the end of the year due to a combination of the recession and the fact that bond yields remain high, said Diego Iscaro, economist at IHS Global Insight.
Portugal has the lowest rating in the euro zone now that Greece is in default, so we assess that if there is a probability of default, it's higher in Portugal than in any other country in the euro zone, S&P analyst Moritz Kraemer told Reuters.
Kraemer said Portugal's situation was different to Greece, partly because it is seen as more able to implement adjustment.
But on the other side of the coin you have a really poor growth prospects for some time to come while the deleveraging both in the public and the private sector runs its course.
Reflecting those concerns, Portuguese bonds have failed to fully benefit from the rally in other European peripheral government bonds in recent weeks.
Portuguese 10-year bond yields rose slightly on Tuesday to 13 percent.
Gaspar ruled out any possibility of seeking more funding.
We will not ask for more time or money, Gaspar said, adding there was no discussion of that during the IMF/EU team's evaluation of the economy. There will be no signal coming from the government other than meeting the terms of the programme.
Portugal's centre-right government has raced ahead with reforms of the uncompetitive economy in recent weeks, especially of its rigid labour market, in an effort to win approval from creditors and ensure the country can ride out its debt crisis.
Under the bailout, Portugal must cut its budget deficit to 4.5 percent of gross domestic product this year from 5.9 percent last year - a goal that was only met thanks to a one-off transfer of banks' pension funds to the state.
The lenders are expected to issue a statement on the review later in the day.
(Additional reporting by Paul Carrel; Writing by Axel Bugge; Editing by Catherine Evans)